With finishing your college degree comes an incredible sense of accomplishment, an expanded mind and improved job prospects. In many cases, it also comes with the responsibility of repaying student loans. This often feels frightening and some recent graduates don’t even know how to go about getting started.
Choosing the right repayment plan is an ideal place to begin and will help make the task of student loan repayment seem more manageable.
Standard Repayment Plans
If you don’t choose another plan, you will automatically be enrolled in the standard payment plan, which requires you to make payments of at least $50 each month for up to 10 years.
The monthly payment with this plan is higher than with others, but you’ll finish repaying your student debt quicker and, as a result, incur less interest. This means that you will pay less overall. If you can afford the monthly payments, the standard plan is the best option. This is why the majority of people are on this plan.
Graduated Repayment Plans
With the graduated repayment plan, you start off paying a smaller amount that increases every two years. However, no payment will ever be three times higher than any other. You’ll still finish paying back your student loans within 10 years.
If you can’t make the higher payments that come with the standard plan at first but your income is going to increase over time, this is a good choice. The downside is that your interest will be higher over the long term than with the standard plan.
Extended Repayment Plans
If you need a longer time to pay back your loan, the extended repayment plan could be the best choice for you. It allows up to 25 years to finish paying off your debt. You can pay a fixed amount each month like the standard plan or have them increase over time like with the graduated plan.
If you want smaller monthly payments but don’t mind taking longer to finish paying them off, the extended plan could give you the time you need. Because it will take longer, you’ll also have more total interest to pay off. You must have over $30,000 in Direct or Federal Family Education Loans borrowed after October 7, 1998 to qualify.
Income-Based Repayment Plans
If you qualify for a “partial financial hardship,” you can choose an income-based repayment plan. This option limits what you pay up to 15% of your discretionary income, and the amount gets readjusted every year. If you make regular payments for up to 25 years, you may be able to have the rest of it forgiven. If you work in a public service position, some loans may be forgiven after 10 years. The government may also pay any accrued interest not covered by your payments for up to three consecutive years.
If you qualify, these plans can cut down on the amounts of your individual payments significantly. You may end up paying more interest and income tax on forgiven amounts though. You’ll have to submit paperwork each year. If you submit these documents too late, you will automatically be switched to a standard plan.
Pay as You Earn Repayment Plans
Pay as you earn (PAYE) plans are similar to income-based plans, but your monthly payments are limited to 10% of your discretionary income and debts can be forgiven after 20 years if you make regular payments. Like with income-based plans, public service workers could have their debts forgiven in 10 years. You can also get your accrued interested paid off for up to three years in a row.
This plan is a good option if you can get it. To qualify, you must have been a new borrower as of October 1, 2007 and have received money from a loan on or after October 1, 2011. A revised version became available in 2015.
Income-Contingent Repayment Plans
Income-contingent plans are also similar to income-based and PAYE plans. Your payments will change based on your income, family size and loan amount. The amount is either 20% of discretionary income or the amount you’d pay on fixed 12-year plan based on what you earn. You’ll pay whichever amount is lower. You can also have your debts forgiven after 25 years.
You’ll pay more in interest and income tax with this plan, but if you want to keep payments low and don’t qualify for a partial financial hardship, this option might be your best bet.
Income-Sensitive Repayment Plans
If you don’t qualify for income-contingent plans, you could apply for an income-sensitive plan. This option allows you to choose a payment between 4% and 25% of your monthly gross income as long as it’s more than the interest you accrue.
You must reapply for this program every year and can only participate for five years. If you want a more flexible plan that allows for lower payments, it may be worth it to apply.
Knowing how to repay student loans is the first step to paying them off in a financially responsible and sustainable way. Because the best way to do this differs from person to person, borrowers can choose from several different options for repaying their student loans.